Carney Seeks ‘Escape Velocity’ as Head of Bank of England

Mark Carney’s activism was on display Jan. 26 at the World Economic Forum’s annual meeting in Davos, as seen in this photo, when he described how central banks worldwide have room for more stimulus through communications and other tools. Photographer: Jason Alden/Bloomberg

Poised to be the first foreigner to run the Bank of England
since its founding in 1694, he will address lawmakers on Feb. 7
in London, days after declaring central banks aren’t “maxed
out” on what they can do to drive their economies. At the same
time, the central bank’s Monetary Policy Committee will be
meeting on the other side of the capital, and Carney’s future
colleagues probably won’t add to their quantitative-easing
program as inflation ties their hands.

The challenge for Carney, 47, and a new class of central
bankers worldwide is resistance to their talk of monetary
activism by officials and investors who say further stimulus may
do more harm than good. Carney’s U.K. arrival in July could mark
an early test case for how far policy makers can spur growth
when support for action such as bond-buying is faltering and
doubt surrounds other unconventional tools.

“Expectations for him are through the roof, but he’s
absolutely got the right approach,” said David Blanchflower, a
former Bank of England policy maker who now teaches at Dartmouth
College in New Hampshire. “The question is how he’s going to
convince other people.”

Governor of Canada’s central bank since 2008, Carney was
appointed to the Bank of England position in November. He will
take the helm as it gets responsibility for bank regulation and
ensuring financial stability. He also must address the results
of reviews criticizing the bank’s forecasting ability and
management. With such demands, and London’s role as a financial
hub also under threat from the Libor scandal, it’s been said the
next governor will need to be like Superman.

Triple-Dip Recession

Carney will testify before U.K. lawmakers five months
before he succeeds Mervyn King, 64. Any comments on the British
economy would come as the country flirts with an unprecedented
triple-dip recession amid the tightest fiscal squeeze since
World War II. Scope for further monetary stimulus still may be
limited as inflation enters a fourth year above the central
bank’s 2 percent target.

Under King, the bank cut its benchmark interest rate to a
record-low 0.5 percent and started a bond-buying facility that
had purchased 375 billion pounds ($591 billion) of assets by
November. Officials now are monitoring a new credit-easing
program, and their policy announcement this week probably won’t
include additional bond purchases, according to 43 estimates in
a Bloomberg News survey.

Stoke Demand

At their January meeting, some of the nine MPC members
questioned the ability of quantitative easing to stoke demand
and said their credibility could be jeopardized if inflation
remains above target through 2013, according to the minutes.

Carney arrives having professed his faith in the power of
monetary policy and hinting that he’s willing to consider new
measures. If he can act, it would be bullish for U.K. stocks,
according to Credit Suisse Group AG analysts led by London-based
Andrew Garthwaite. Shares of companies with positive earnings
momentum and exposure to the economic cycle -- including
retailer Next Plc and homebuilder Persimmon Plc -- would be
among the beneficiaries if Carney succeeds in encouraging
expansion, they said in a Jan. 22 report.

‘Open Minded’

Carney already has fueled “sterling-negative sentiment,”
said Kit Juckes, head of foreign-exchange research at Societe
Generale SA in London. Juckes anticipates the pound will weaken
toward 90 pence per euro from about 86 pence yesterday.

Carney’s activism was on display Jan. 26 at the World
Economic Forum’s annual meeting in Davos, Switzerland, when he
described how central banks worldwide have room for more
stimulus through communications and other tools. He suggested
economies like the U.K. that face budget cuts can be flexible in
allowing interest rates to stay low even if inflation is above
target.

“There continue to be monetary-policy options in all the
major economies,” he said. The task for policy makers is to
“achieve escape velocity.”

His remarks followed a December speech where he outlined
the benefits of guiding investors on rates and even discussed
the merits of switching to a gross-domestic-product target,
although he denied having the U.K. in mind.

Remain High

“People have been worrying about the effectiveness of QE,
but Carney is saying that central banks aren’t done,” said
Richard Barwell, an economist at Royal Bank of Scotland Group
Plc in London and a former BOE official. “The problem for most
of the MPC is that they don’t necessarily think they need to do
more because inflation is too high, has been for quite some time
and will remain high.”

Carney’s transatlantic move may mark the latest in a
central-banking revolution toward leaders who sound and then act
more aggressively than their predecessors. Mario Draghi, who
replaced Jean-Claude Trichet at the European Central Bank in
2011, backed deeper interest-rate cuts and broader bond-buying.

At the Bank of Japan, Governor Masaaki Shirakawa’s
departure allows Prime Minister Shinzo Abe to name a replacement
who shares his zest for more activist monetary policy. Shirakawa
said today he’ll bring forward his exit to March 19 from April
8, when his term finishes. A year from now, Janet Yellen, ranked
by JPMorgan Chase & Co. as among the most dovish Federal Reserve
officials, may be a candidate to replace Chairman Ben S.
Bernanke atop the Fed when his second term expires.

Alter Mandate

In the U.K., King’s resistance to expanding QE beyond gilts
prompted former policy maker Adam Posen to complain to the BOE’s
supervisory board. King also rejected giving investors guidance
on interest rates and hasn’t pushed for the government to alter
its inflation mandate.

Prime Minister David Cameron’s commitment to austerity has
limited the government’s capacity to stoke growth, fostering the
perception that the central bank is “the only game in town,”
even though monetary policy is “not a panacea,” King said on
Jan. 22.

“Personally I’m sympathetic to arguments that there comes
a point when there’s a limit to what monetary policy can do,”
said Howard Davies, a former deputy governor of the Bank of
England.

Boost Credit

Carney still has room to act, said Kate Barker, another
former policy maker. Among his immediate options is telling
Chancellor of the Exchequer George Osborne that inflation will
take longer to return to target and introducing the Canadian-style practice of guiding investors on how long interest rates
may stay low.

A Carney-run Bank of England also could beef up existing
programs, according to Simon Hayes, chief U.K. economist at
Barclays Plc in London. He suggests there may be an effort to
buy assets other than gilts, such as bank bonds, or to expand
the Funding for Lending Scheme, aimed at boosting credit by
allowing banks to borrow at cheaper rates.

To Simon Wells, a former central-bank economist now at HSBC
Holdings Plc in London, the dilemma for Carney is whether the
U.K. will respond to more monetary medicine. That’s because
he’ll inherit an economy riven with structural weaknesses and a
likely permanent loss of some output and productivity following
the financial crisis. The upshot is stimulus may only boost
inflation and promote “zombie companies” rather than growth.

“There may just not be that much spare capacity, and so
being bolder may mean being riskier,” Wells said.

Justify Stimulus

His argument has echoes within the central bank, which
would have to justify stimulus after inflation held at 2.7
percent in December, the 37th consecutive month above target.

While some of the rise in prices can be blamed on energy
costs and a decline in sterling, “much is probably a by-product
of the painful adjustments our economy has been forced to
make,” BOE Chief Economist Spencer Dale said Dec. 12. The New
York-based Conference Board last month estimated U.K. labor
productivity growth shrank 1.3 percent in 2012.

Still, colleague David Miles has pushed for more asset
purchases. He says there’s a fair amount of slack in the
economy, so it’s possible to spur demand and avoid a permanent
falloff in hiring and output without further inflation.

Even if Carney does decide to act, he won’t be as free as
he was in Canada, where the governor is legally mandated to set
policy and relies on the consensual support of colleagues for
decisions. At the Bank of England, he will have just one of nine
votes on the policy panel, something he acknowledged Jan. 23
when he said he’ll ensure the committee structure works to its
“full effect.”

Unemployment Threshold

The first test may come if Carney tries to persuade his new
colleagues to embrace forward guidance as a way to restrain
market borrowing costs. In April 2009, he pledged to keep
Canada’s benchmark rate at a record low until mid-2010 so long
as the inflation outlook didn’t change. More recently, the Fed
has copied that playbook and in December fleshed it out to
include thresholds for unemployment and inflation.

U.K. officials have resisted such telegraphing, with King
and other policy makers arguing it would be wrong to lock in
future decisions and saying it’s hard to commit nine people to
agree on a policy path amid turnover on the MPC. Amit Kara, an
economist at UBS AG in London, says the lower market interest
rates resulting from signposting aren’t enough to compensate for
potential reputational risk.

Kick-Start Debate

While Jens Larsen, an economist at RBC Capital Markets in
London and another former BOE official, says Carney probably
will secure some form of guidance, he calls the debate over
whether to replace the inflation target with another goal, such
as the level of GDP, “overdone.”

Carney kick-started that debate in December when he said a
nominal GDP goal sometimes can have a “more powerful” effect
when interest rates are around zero. The argument is that it
allows the central bank to make up for lost output, implying
policy will stay loose for longer.

Still, economists say such a goal could be confusing, hard
to establish, ignite inflation expectations and be vulnerable to
lagging and frequently revised data. Larsen says the bank’s new
regulatory powers also will enable it to intervene enough in the
financial sector to free up credit without changing focus.

What Carney may need most in his toolbox is the luck of
global growth and a return of animal spirits among investors,
said Barker, who is now an adviser to Credit Suisse.

“Timing is everything with jobs, and he may be very
lucky,” she said. “If he comes at a good moment, where he can
be a new man telling a slightly new story and people are in the
mood to believe him, that will help have good expectational
effects.”